Wednesday, January 18, 2012

Hartley Henderson has published a prospicient article at Off Shore Gaming Association, "Could Virtual Currency be the Future of Internet Betting?". The author has identified a man known as R.C. who emphatically endorses bitcoin as a means of payment for online gambling and casinos across almost all jurisdictions. This supports our thesis that bitcoin is the digital equivalent of a physical casino chip. Henderson summarizes his discussion:

'If I had any say, all transactions at our book would be done in
bitcoins,' the man said. 'They are untraceable and totally out of the
control of any government. And most importantly they are an investment
which someday I’m confident will rival silver prices.'

The author then asks R.C. specifically what makes bitcoins a better option than cash for online gambling:

"As you know, money transfer is vital to the sports betting,
casino, and online poker industries. Bitcoin is an amazing solution.
Through a combination of math and cryptography - it is a completely
decentralized currency/commodity. That means no entity is in control, it
is managed by all the nodes of the network, collectively. You can think
about it like bitTorrent, if you are familiar with the file sharing
protocol; purely peer to peer with no central management.

Through this cryptography and decentralized design, each node on
the network is a 'bookkeeper' of which bitcoin addresses own which
coins. You cannot fake or forge a transaction or create coins outside of
the system. Each node has a record and will not accept forgeries. So,
even though there is a public record of all bitcoin transactions, the
key is that nobody knows who owns a particular address and thus those
bitcoins. So on the one hand it is completely transparent - all coins
and transactions are public, but on the other hand nobody knows who owns
those coins/bitcoin addresses. You can see how it could be useful to
gamblers."

Peer-to-peer wagering, or social betting, is gaining quickly in popularity and Henderson makes the point that companies receiving a membership fee are distinctly different from companies that receive a commission on the winning bets:

"What R.C. didn’t mention is that in no country is
peer to peer wagering illegal. There is nothing in the law that stops
person A from wagering $20 with person B on the outcome of a game. What
makes the transaction illegal in some countries is when an intermediary
acts as the bookmaker. That is precisely why Betfair and Matchbook are
seen as technically illegal by the U.S. government. Both are peer to
peer wagering operations but they also take a commission on the winning
bets. BTCSportsBet.com doesn’t do so. They simply have paid members."

Henderson also makes the bold case that bitcoin as a payment mechanism
doesn't fall under the UIGEA because there is no money involved and there
is no way the Department of Justice can effectively intrude. Our man R.C. perhaps explained it
best:

"As far as UIGEA, there are no banks or processors involved.
Moving bitcoins around is just like moving an image file or other data
around. I would expect to see bitcoin-specific legislation before any
attempt to apply the UIGEA. But even with legislation, I expect the
future of bitcoin to be bright. There is no central authority to shut
down. There are laws against file sharing copyrighted works, but due to
the distributed nature of bitTorrent it cannot be effectively policed.

As far as pressure from the DOJ or other
entity (it’s not a viable concern). Bitcoin can be classified as a
commodity, or a currency, or nothing at all (it's just data). One can
argue that it is like Facebook credits or World of Warcraft Gold. The
government is not going after them. Also, the terms and conditions for
BTCSportsBet.com states that the player is responsible for determining
the legality of playing with bitcoins in his or her jurisdiction.
Sign-ups are anonymous and the site does not know the origin of the
players. No personal identification is requested; even an email address
is optional. A player can sign up, send bitcoins, wager, and withdraw
without the site ever knowing who he or she is. The properties of
bitcoin allow this to happen. There can be no fraud, identity theft, or
reversed transactions. All of those headaches are a massive cost to the
industry - so you can see why bitcoin may be a significant factor in the
future of online wagering."

Regarding the claims above, it remains to be seen if Facebook Credits will ever permit two-way exchange and, even if they did, that the U.S. regulatory authorities wouldn't move promptly to include them under the 'Prepaid Access Rule' for financial products. In the meantime, I agree that the resilient bitcoin is more suited to the monetary challenges ahead and it is another case of technology being ahead of the law.

Whether you think its stupid or not, thousands of people do it and will continue to do so. It's called Gambling. If you were truly smart you wouldn't gamble at all because you will lose, whether online or at a casino. Hundreds of individuals still fall for internet scams with promises that they one the lottery even though they know it to be a ripoff scam. People are and will continue to gamble online.The point of the article is that bitcoins and digital currency make it faster, easier, cheaper, more anonymous, and more secure to do so. Unless any of these is proven to be untrue, the adoption of bitcoin is inevitable in such a market.

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2003

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995